Rupee ends tad higher as dollar droops after US credit downgrade

The Indian rupee ended modestly higher on Monday, hoisted by a weaker dollar, hurt by concerns over U.S. debt and deficits following a Moody’s downgrade of the country’s sovereign credit rating late last week. The rupee closed at 85.40 against the U.S. dollar, up 0.1% on the day. The currency had dipped to a low of 85.61 in early trading but reversed course as the dollar declined by about 0.6% against major peers.

Asian currencies were mostly stronger on the day with the Thai baht leading gains with a 0.8% rise. Safe havens like the Japanese yen and Swiss franc, meanwhile, rose alongside the price of gold.

A broadly weaker greenback and foreign banks’ dollar sales helped the rupee nudge higher on the day but the gains were limited by routine dollar bids from local companies, traders said.

Meanwhile, dollar-rupee forward premiums dipped on the back of a rise in U.S. bond yields spurred by the same concerns that weighed the dollar down on Monday.

The 10-year U.S. Treasury yield rose 10 basis points to above 4.50% while 1-year Treasury yield rose by 3 basis points to 4.15%.

“The link between US sovereign risk, Treasuries, and the dollar is one of capital flight,” ING Bank said in a note.

“Expect a risk premium to stay in the dollar this week,” the note added. Equity futures indicated that U.S. stocks would open in the red on Monday with the S&P 500 futures sliding by over 1%.

In the near-term, traders expect the rupee to be acutely sensitive to developments regarding a U.S.-India trade deal which would also impact foreign portfolio flows into Indian equities.

Foreign investors have net bought about $2.2 billion of Indian stocks over May so far.